Domain Name Industry Buyout Watch
2009 could include more mergers, acquisitions, and outright closings.
Domain name firms counting registrars, parking firms, and portfolio holders are considering their strategic options in 2009.
Reglike has learned that Dark Blue Sea (ASX: DBS) has been shopping its services businesses, counting Fabulous parking and registration. Dark Blue Sea CEO Richard Moore wouldn’t comment directly on what the firm is considering, but he did refer me to the firm’s third quarter release:
In the context of the expected industry consolidation, the Firm is right now exploring a range of strategic options with other domain industry service providers. Whilst it is a difficult time to consummate transactions given the industry-specific and general economic uncertainty as well as market volatility, discussions with other industry participants suggests the timing is appropriate.
Whether or not Dark Blue Sea sells any of its businesses or enters into other agreements, 2009 will be an interesting year for domain firms. Based on conversations with a number of domain firm executives and sources over the past four weeks, here’s how I see the playing field.
Services businesses’ margins are modest and getting smaller. Domain services, such as registration and parking, work on fairly slim margins. These are under increasing pressure. Firms are considering what, if anything, to do with their service lines. Under particular pressure are modest domain parking firms.
There are fixed costs and variable costs at parking firms. The fixed costs include the cost of initial servers, technology/software, and enough people to service accounts and keep the lights on.
Modest domain parking firms get less revenue from Google and Yahoo than their bigger counterparts (perhaps 10%-15%), but still have the same baseline costs. At some point, modest parking firms become unprofitable.
With a fall in parking revenue, some of these parking firms may have slipped below thresholds required by Google and Yahoo and may not have their contracts renewed.
Fabulous generates $2M-$3M USD quarterly in gross revenue from parking clients’ domains and regarding $1M USD from parking its own domains. It hands over roughly 80% of the gross from client domains to its parking clients.
You can expect to see smaller parking firms selling themselves to big players and at low earnings multiples, or simply shutting their doors.
Outsourcing is in. Look for Directi, parent firm of Skenzo, to reap benefits of its lower cost operations in India. Skenzo by now provides the back end for a number of parking operations (counting those of domain registrars) and registrars. Perhaps existing parking firms will outsource some of their operations to Directi.
Who’s in a good position?
Sedo – although its domain parking revenue has taken a hit, the firm remains strong. Its brokerage business is holding steady, even though it’s a modest part of the firm’s revenue. It can also tap into the resources of its parent firm Adlink.
Oversee.net – buoyed by a $150M investment and no debt, Oversee may be opportunistic in 2009. The firm has been burned by its two big acquisitions (SnapNames since it lost Network Solutions and Moniker since it bought at the top of the market). But lessons learned may lead to smart buys at the bottom of the market rather than the top. And although SnapNames isn’t performing as planned, more drops in the coming year may boost its revenue.
Directi – I have less knowledge of Directi’s positioning, but it does appear strong. It received an investment in its Skenzo unit and remains an outsourcer of choice.
Demand Media – Demand Media, parent of eNom, NameJet, and HotKeys, is a wildcard since it’s hard to understand its strategy. But I expect the firm to be opportunistic in the downturn.
In general, firms that own more of the value chain ought to hold up better than one trick ponies.
Specific acquisitions
Here are a couple ideas:
Existing Google partner buys Fabulous – existing Google (NASDAQ: GOOG) partners include NameDrive, Sedo, Oversee.net, and this little firm called GoDaddy. Perhaps GoDaddy ought to form a serious domain parking unit to take advantage of its massive scale. GoDaddy by now has a partnership with Dark Blue Sea to sell domains. Maybe GoDaddy could pick up a true domainer’s registrar and create a fresh brand around it.
Oversee goes international – it’s no secret that DomainSponsor is the dominant Google U.S. partner and Sedo the dominant Europoean/international Google partner. Although buying domain parking firms can be a tricky business (no long term client contracts), it will be interesting to see if DomainSponsor makes a play here to bolster its international capabilities.
[Update: DBS CEO Richard Moore e-mailed me to suggest that the paragraph I took from the firm’s third quarter note ought to be read in the context of the entire section. You may read the note here (pdf). Update: this link is no longer active and has been removed.]
